US Economy Expansion Essays - National Accounts, Consumer Behaviour

US Economy Expansion The million (or should we say 'billion' now) dollar question is whether or not the United States' economy will stay in it's record 107 month expansion (according to the index of leading indicators) or come out of the boom and take a downturn into a recession. Nobody, including the Chairman of the Federal Reserve, Alan Greenspan has a crystal ball to provide insight as to what will happen if interest rates are raised, lowered, or left alone. However, Economists have developed a set of indicators to aid in predicting when a recession is about to occur and when the economy is in one. Indicators should not be mistaken for predictors. They are simply forecasting tools, and like any forecast can be misleading. The index of leading indicators that is reported in the popular press shows our economy is still in an expansion. For the purposes of our evaluation of the economy, we chose the Principle Economic Indicators tracked by the Bureau of Economic Analysis and the U.S. Census Bureau under the Economics and Statistics Administration at the U.S. Department of Commerce. There are thirteen Principle Economic Indicators, and they fall into five major categories: National Output and Income; Orders, Sectoral Production, and Inventories; Consumer Spending; Housing and Construction; and Foreign Trade. National Output and Income The first of the five major categories directly relates to measuring the growth of the U.S. economy. National Output and Income consists of the Gross Domestic Product (GDP), Personal Income, and Corporate Profits measurements. GDP is the primary measurement of growth and measures the total amount of goods and services produced by governments, businesses, people, and property located within the United States. Both real (adjusted for inflation) and nominal (current value in dollars) data is collected for computing the GDP. The base year for the real data is 1997. The GDP is normally reported as an annualized quarter-to-quarter change. The reason this measurement is vital to tracking the growth of the U.S. economy is self-explanatory. When the economy is growing, both total income and total output are increasing. Furthermore, a steady increase in the GDP is healthy for the economy. According to the U.S. Department of Commerce, U.S. economic output has grown at an annual rate of 2.5 to 3.5 percent since 1890. The preliminary estimate of GDP in the fourth quarter of 1999 rose at a 6.9 percent annual rate, which is the strongest gain since a similar increase in mid-1996. This is an increase from the initial estimate of 5.8 percent and is consistent with the expectations of analysts. It is also a reflection of the widespread upward increases among the major spending components, including consumer spending, goods exported, and state and local government spending. In the third quarter of 1999, GDP rose 5.7% as a result of increases in Personal Consumption Expenditures, nonresidential fixed investment, and exports. Personal Income is a measurement of total pretax income earned by individuals, non-profit organizations, and private trust funds. It is expressed at an annual rate also. The more Personal Income increases the greater the potential for the American people to spend and save money, which directly influences the growth of the U.S. economy. Personal Income rose .7 percent in January, following an increase of .3 percent in December. The average monthly increases in 1999 were .5 percent. Some extenuating factors affected income in recent months, including cost of living increases in federal transfer payments, a federal pay raise, and agricultural subsidy payments in January. Real disposable income, income after taxes and adjusted for price changes, increased by .7 percent. There was no change in December. The individual personal saving rate rose from 1 percent in December, which was its low, to 1.4 percent in January. Savings rates generally go down in the months October through May due to Holiday spending (includes "paying off" credit cards). There are two methods in which Corporate Profits are reported by the government. "Tax-based" profits are derived from corporate tax returns, and "adjusted" profits reflect earnings from current production. Just as increases in Personal Income are vital to the growth of the U.S economy, increases in Corporate Profits are just as important on an even larger scale. The greater the profits, the more potential for growth. This in turn has a direct effect on employment rates, spending, etc. Profits reported from current production increased $3.7 billion in the third quarter of 1999. This is a dramatic improvement from a decrease of $6.5 billion in the second quarter. Profits would have been about $10 billion more than they were in the third quarter